Class Action Claims Wells Fargo Exploited Customers Through Cash Sweep Program

Case Overview: A class action lawsuit has been filed against Wells Fargo, alleging the bank mismanaged customer cash deposits through its cash sweep program, generating billions in profits while paying clients minimal returns.

Consumers Affected: Wells Fargo customers who participated in the bank's cash sweep program.

Court: U.S. District Court for the Northern District of California

Wells Fargo is being accused of betraying consumers and its legal obligations by using its clients’ cash balances to generate massive profits for the bank, but passing on little to those whose money it is profiting off, a new lawsuit alleges. 

Instead of “fulfilling its fiduciary duties, contractual obligations, and a regulatory mandate to act only in the best interests of its clients,” the bank uses a scheme whereby it generates these huge profits—nearly $4 billion in 2023 alone—by taking the lion’s share of interest earned on cash deposits, the lawsuit argues.

Wells Fargo Accused of Cashing In on Customer Deposits

Hawaii resident Edward Nadolny filed the proposed class action against Wells Fargo Clearing Services, alleging that the financial services giant has prioritized its interests over those of its clients, violating both contractual obligations and regulatory mandates.

Nadolny alleges Wells Fargo’s misconduct centers around its Bank Deposit Sweep Program (BDSP), programs that “figuratively “sweep” clients’ cash balances into interest-bearing accounts at a network of banks.” 

Wells Fargo makes more money when its clients’ funds are invested in the bank’s own cash sweep program, because, Nadolny alleges, the interest rates it passes on to clients “are neither reasonable nor in compliance with its legal duties.”  

Instead of securing reasonable interest rates for clients' cash balances, Wells Fargo allegedly devised a scheme to enrich itself, whereby it allegedly earns up to 5.63% interest on clients’ cash in the BDSP, while clients receive only a fraction of that—0.05% for investments up to $1 million and at most 0.5% for accounts holding more than $10 million, according to the lawsuit. 

These rates are significantly lower than those offered by other brokerage firms, such as Vanguard and Interactive Brokers, which pay 4.6% and 4.83% respectively for similar balances. “Defendants’ misconduct was extremely lucrative, but extremely detrimental to their clients—in flagrant violation of their duties to their clients,” Nadolny states.

SEC Heat on Wells Fargo's Cash Sweep Program

In 2023 alone, Wells Fargo generated nearly $4 billion in net interest income from this practice, at the detriment of its clients, the lawsuit states, adding Nadolny’s lawsuit is not the only challenge Wells Fargo faces over its cash sweep program and outsize profits.

The Securities and Exchange Commission (SEC) began investigating the company’s practices in September 2023, focusing on whether the cash sweep options provided to advisory clients comply with regulatory requirements. 

In a July 2024 earnings call, Wells Fargo acknowledged that it was raising rates in its BDSP, a move expected to reduce its earnings by approximately $350 million.

Wells Fargo's Fee Frenzy: Low Returns, High Costs

The lawsuit also alleges the management fees Wells Fargo charges its clients are strikingly disproportionate to the returns clients receive. While Wells Fargo secures minimal interest rates for clients’ cash balances, it charges a typical annual management fee of approximately 1.0% on the value of advisory accounts, including the cash balances. 

This means that a client with nearly $1 million in their sweep account would earn just 0.05% on their investment, while the advisor collects a 1.0% fee for managing it.Nadolny argues that this discrepancy is particularly egregious, as it adds to the financial harm clients are getting at the hands of the bank.

Banking Industry Under Fire Over Cash Sweep Practices

Wells Fargo isn’t alone in facing scrutiny for its BDSP.  Clients of Ameriprise Financial, LPL Financial, and Morgan Stanley have similarly accused these companies of using customers’ cash balances to enrich themselves at the clients' expense. The suits allege breaches of fiduciary duty, unjust enrichment, and violations of regulatory standards. This week, the SEC announced it was looking into Morgan Stanley for the same issue.

Meanwhile, Wells Fargo is embroiled in several other scandals, including facing allegations of supporting a Ponzi scheme that defrauded 1,000 mostly senior investors out of $300 million. The scheme, allegedly run by Marshall Seeman, Eric Holtz, and Brian Schwartz, used Wells Fargo to store the investors' funds.

Further, Wells Fargo is being sued by a California piano teacher, Helen Palma, who claims the bank illegally drained her savings account to pay her credit card debt without her consent. Palma's lawsuit suggests that she may not be the only customer affected by such practices.

Case Details

• Lawsuit: Nadolny v. Wells Fargo & Company, et al.
• Case No.: 4:24-Cv-04633-Dmr
• Court: U.S. District Court for the Northern District of California 

Plaintiffs' Attorneys

• Deborah Rosenthal, Thomas I. Sheridan, III, and Sona R. Shah (Simmons Hanly Conroy LLP)
• Matthew L. Dameron and Clinton J. Mann (Williams Dirks Dameron LLC)
• Bruce D. Oakes and Richard B. Fosher (Oakes & Fosher, LLC)

Have you been affected by low interest rates on your cash sweep account? Share your experience in the comments below.